Idk Economics Essay

4779 words - 20 pages

N. Gregory Mankiw

Economics
Principles of

Sixth Edition

13
The Costs of Production

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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ACTIVE LEARNING

1

Brainstorming costs
You run Ford Motor Company.
 List three different costs you have.
 List three different
business decisions
that are affected
by your costs.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for ...view middle of the document...

Implicit
 Explicit costs require an outlay of money,
e.g., paying wages to workers.
 Implicit costs do not require a cash outlay,
e.g., the opportunity cost of the owner’s time.
 Remember one of the Ten Principles:
The cost of something is
what you give up to get it.
 This is true whether the costs are implicit or
explicit. Both matter for firms’ decisions.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4

Explicit vs. Implicit Costs: An Example
You need $100,000 to start your business.
The interest rate is 5%.
 Case 1: borrow $100,000
 explicit cost = $5000 interest on loan

 Case 2: use $40,000 of your savings,
borrow the other $60,000
 explicit cost = $3000 (5%) interest on the loan
 implicit cost = $2000 (5%) foregone interest you
could have earned on your $40,000.
In both cases, total (exp + imp) costs are $5000.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5

Economic Profit vs. Accounting Profit
 Accounting profit
= total revenue minus total explicit costs
 Economic profit
= total revenue minus total costs (including
explicit and implicit costs)
 Accounting profit ignores implicit costs,
so it’s higher than economic profit.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6

ACTIVE LEARNING

2

Economic profit vs. accounting profit
The equilibrium rent on office space has just
increased by $500/month.
Determine the effects on accounting profit and
economic profit if
a. you rent your office space
b. you own your office space

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ACTIVE LEARNING

Answers

2

The rent on office space increases $500/month.
a. You rent your office space.
Explicit costs increase $500/month.
Accounting profit & economic profit each fall
$500/month.
b. You own your office space.
Explicit costs do not change,
so accounting profit does not change.
Implicit costs increase $500/month (opp. cost
of using your space instead of renting it),
so economic profit falls by $500/month.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or...

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